Wall Street Guilty As Charged

May 16, 2011

Richard Eskow

In a piece called “Wall Street: Not Guilty,” financial columnist Roger Lowenstein attempts to defend Wall Street against allegations that it’s a viper’s nest of rampant criminality. His mischaracterization, mockery, and vague suggestions of McCarthyism are strident, flat, and fail to get the job done. But Lowenstein’s piece is well worth reading, if only as a case study in the moral and cognitive blindness that’s reached epidemic proportions in influential Washington and Wall Street circles.

Lowenstein shows us how people who are undoubtedly thoughtful and ethically-minded in their personal lives can lose their way when confronted with complex moral and legal issues, especially ones involving people they know personally. And his misdirection and vituperation suggests how unsettled they become when their worldview is challenged.

It’s a shame. The analytical and moral flaws in Lowenstein’s piece obscure some of the very sound points he makes about the wrongheadedness of our country’s financial culture, a topic that deserves more thoughtful discussion. Without a clear rebuttal, this wrongheaded view is likely to become tomorrow’s conventional wisdom.

Hooray for Hollywood

Lowenstein unselfconsciously mocks “armchair prosecutors” even as he appoints himself armchair defense counsel, armchair judge, and armchair granter of blanket amnesty. His basic argument is that “risk-taking and stupidity aren’t criminal,” as the subheading to his piece puts it; that there may have been crimes committed, but they’re minor and incidental to the financial collapse; that no greater purpose is served by a massive investigation of Wall Street; and that people who argue otherwise are angry, misguided, self-righteous persecutors.

Let’s start with that last point first. One wonders how much of Lowenstein’s extensive use of class-baiting, right-wing symbolism is deliberate and how much is unconscious. I don’t know his politics, but reading this piece is like spending an unpleasant holiday dinner listening to your sloshed Tea Party uncle. He opens with Charles Ferguson’s comments at the Academy Awards, where Ferguson noted that nobody has gone to jail since the financial crisis, then adds mockingly: “How many dinner party guests have debated the trillion-dollar question: When will a Wall Street executive be sent to jail?”

Hollywood. Dinner-party guests. Get it? In Lowenstein’s world, bank crimes are only of interest to wealthy lefties who sit around judging others while they’re sipping frosty cocktails and nibbling on hors d’oeuvres. That will come as a surprise to the seven million people who lost their jobs as a result of the financial crisis.

Straw Men Marching in Formation

Lowenstein then misrepresents the views of people he’s already characterized as a dinner-party lynch mob, claiming they believe the following: “that people who take big risks should be subject to a criminal investigation; that executives of large financial firms should be criminal suspects after a crash; that public revulsion indicates likely culpability; that it is inconceivable … that people could lose so much money absent a conspiracy; and that Wall Street bears collective guilt for which a large part of it should be incarcerated.”

Of course, he can’t cite anybody except Bernie Madoff who’s actually made these claims – because they don’t exist. Nobody believes that “people who take big risks should be subject to criminal investigation” – although many believe their banks should be broken up if they’re a threat to the system, so we don’t have to rescue them again. And nobody believes “executives of large financial firms should be criminal suspects after a crash” – unless there’s evidence they’ve committed crimes, and there’s plenty. Joe Nocera, Matt Taibbi, and the others named by Lowenstein simply want to see that evidence used in prosecutions.

“Public revulsion indicates likely culpability”?? Again, who ever said that? If public revulsion suggested culpability,every singer who’s ever used Auto-Tune would be under investigation right now.

Perhaps Lowenstein’s worst subliminal cue is the phrase “collective guilt,” most commonly used when discussing the crimes of Germany under the Nazis. And the historian Richard Hofstadter must be spinning in his grave as Lowenstein distorts his work to slur bank critics with the concept of “The Paranoid Style in American Politics,” a term Hofstadter applied to McCarthyism and conspiracy theories in general. Writes Lowenstein:

The paranoid style, as Hofstadter defined it, has as much to do with “style” as paranoia–it’s about “the way in which ideas are believed [more] than with the truth or falsity of their content” … We could follow this strain through the dismal historiography of JFK assassination buffs to the beliefs that Washington was implicated in Pearl Harbor and Sept. 11, to the anti-federalist fantasies of the far right.

Got that? If you think Wall Street crimes should be prosecuted, you’re like the people who believe that the United States sank the USS Arizona to start World War II or blew up the World Trade Center on 9/11.

We need a historian in the Bloomberg newsroom … stat!

Adds Lowenstein: “… (F)inancial history is replete with bubbles and crashes. No person–no criminal, that is–caused the Great Depression.”

I don’t know which is worse: Lowenstein’s ad hominem attacks or his apparent lack of grounding in financial history. While no single person, criminal or otherwise, caused the Great Depression, the fraudulent actions of a number of people contributed to it. As a result of the Pecora Commission hearings that followed those acts were made illegal, a regulatory framework was created, and some of the bankers subpoenad by Pecora were “scared straight” for a long time.

Recessions, bubbles, and crashes aren’t acts of God or nature. They’re caused by human beings – and often by fraud.

The Fifth Estate Bubble

Of course, it’s hard to make an accurate judgement about Wall Street’s crimes when our information comes from journalists biased in its favor.

The kindest interpretation is that Dimon has failed to root out a culture of corruption in his own organization. And yet he was the subject of a fawning profile in the New York Times, one which repeatedly painted him as the talented and noble victim of persecution by unfair and mean-spirited critics. The author of that profile?

“Risk taking and stupidity aren’t criminal”: That’s true as far as it goes – which isn’t very far. Risk-taking and stupidity by the big banks were probably the largest factor leading up to the crisis, undertaken in the almost certain knowledge that they’d be bailed out if things went wrong. That’s immoral – and it didn’t occur in a vacuum. Bankers spent decades working to repeal Glass-Steagall, allowing the expansion of “too big to fail” banks into riskier business areas. They worked equally hard to lift the regulations which prevented exactly the sorts of actions that led to the collapse of 2008.

What’s more, “risk taking and stupidity” can become criminal. Lowenstein’s dismissive of Lehman Brothers and “Repo 105,” an accounting deception which hid more than $50 million in debt. That may well be a crime. And the public record on executives in AIG’s Financial Products Group is staggering. Memos and other materials seem to overwhelmingly suggest that executives knowingly made false statements on investor calls. They had been forced to hire outside auditors to settle previous SEC suits, then refused to allow those auditors to see the books – after which they appeared to tell investors that those auditors had seen the books.

Lowenstein argues that even if Lehman CEO Richard Fuld committed crimes with Repo 105 (his hypothetical, not mine) their effect on the crash was “trivial.” Of itself, that’s true. But the indictment of Richard Fuld would be anything but trivial: It would send shock waves across Wall Street and have an enormous deterrent effect. In fact, the financial world as we know it would change forever.

When Al Capone was indicted on tax evasion the offense was ‘trivial’ too. But the effect on the underworld was profound.

“The claim that [the financial crisis] was ’caused by financial fraud’ is debatable, but the weight of the evidence is strongly against it. …” It requires a very narrow definition of ‘fraud’ to make this claim. Lowenstein’s right that the greatest single contributor to the financial collapse was the housing bubble. But America’s biggest financial institutions concealed the extent of their risky investment in that bubble, and there’s widespread evidence that they fueled that bubble for its own purposes.

What’s more, banks across the country encouraged people to borrow more than their houses were worth by providing artificially inflated appraisals of their value. The use of crooked appraisers may constitute consumer fraud. Banks then bundled and sold these inflated loans to investors as mortgage-backed securities, while shorting those securities at the same time, which was fraudulent and may or may not have been illegal.

America’s Most Wanted

And the list of crimes doesn’t stop there. All of our largest banks have pleaded guilty to a number of criminal acts, for which they were ‘punished’ with settlements paid by shareholders instead of lawbreaking executives. It’s quite a rap sheet: Wells Fargo laundered drug money for the Mexican cartels. GE Capital repeatedly committed investor stock fraud (while its parent bribed overseas governments and defrauded the US government). There’s overwhelming evidence that all of our largest banks systematically engaged in the filing of false documents to local courts in foreclosure hearings, which is perjury. And Goldman Sachs … don’t get me started.

And there’s Dimon’s JPMorgan Chase, of course.

And yet as far as anyone knows, no senior executive’s ever been investigated, Even if there’s no evidence they were directly involved in crimes, they may still be culpable under the ‘Lucky Luciano principle if they systematically told their employees they ‘didn’t want to know’ how a job was done.

But nobody has even asked to see their email records or visitor logs. They still come and go in the highest corridors of Washington, and receive fawning coverage from reporters like Lowenstein, to whom they pour out their bitterness about criticism to reporters with a sympathetic ear. Worse, they’re free to engage in risky, stupid, or criminal behavior, secure in the knowledge that they’ll never be held responsible for their own actions.

Even if some of these crimes didn’t lead to the financial crisis, the fact that they’ve gone unpunished contributes to Wall Street’s pervasive culture of criminality. So do pieces like Lowenstein’s. That leaves us all at risk for future crises, great and small. What’s more, it’s immoral, a perversion of justice.